For all the doomsdayers

This is directly from the CRE Analyst I found on LinkedIn. It is not my own work.

With endless speculation about an office tsunami, we analyzed the 25 largest troubled office loans. Many office loans will almost certainly default in coming years, but in the end, nuance may outweigh narrative.

MATURITY WALL

There's a dominant narrative in the media about an imminent maturity wall, which implies an immovable tidal wave. Reality is more complicated. There is certainly about $100B of CMBS office loans scheduled to mature between now and 2026, but many of these loans can and will be extended. So far in 2023, for example, nearly 90% of office loans in special servicing have exited special servicing due to an extension.

METRO CONCENTRATIONS

The narrative around 24-hour cities being stressed seems pretty accurate. NYC, SF, LA, and Chicago are overrepresented in the sample of problem loans, but this could be due to a skew toward more valuable buildings in large cities.

The majority of the top 25 problem loans are in NYC, LA, and Chicago. We expect a precipitous spike in delinquencies in these cities as maturities pick up in the coming years, led by Chicago, with a CMBS office delinquency rate above 10% with 20%+ loans in special servicing.

WORST OF THE WORST

Some big office loans will almost certainly default. 46% of our sample faces extraordinary challenges in a degrading market. Assuming carrying values are inflated by 20%, six loans have LTVs above 100% with three loans above 125% LTV. Nine of the 25 loans have DSCRs below 1.0x. And the smallest loan in our sample is $100M, so these defaults--when they occur--will move the needle on a relative basis.

MOST LOANS COULD GO EITHER WAY

On the other hand, most of the largest 25 loans, despite being overrepresented in problematic cities with high LTVs and low debt service coverage, don't seem destined for defaults and losses. The average loan in the sample, for example, has property cash flow that exceeds loan payments by 20%. Why wouldn't servicers just kick the can on these loans? We suspect that most will, to the disappointment of those rooting for carnage.

KEEPING IT IN PERSPECTIVE

Our sample only represents about 4% of outstanding office CMBS loans, and all outstanding office CMBS loans account for less than 30% of the overall CMBS market. Are these loan challenges serious? Surely. Do they threaten the viability of the entire real estate debt market? Perhaps not.

DETAILS ON OUR SAMPLE - 25 largest problem CMBS office loans - $7B of outstanding principal balance (4% of office CMBS) - 61% average LTV at origination - 88% average LTV with 20% value stress - 1.20x average in-place DSCR - May 2023 average maturity